How will income security and health care financing be affected by population aging; how should they change? An International Perspective Andrew Mason University of Hawaii at Manoa and The East-West Center

Overview How do different societies provide for the economic needs of their elderly? Primarily a descriptive exercise relying on National Transfer Account data. –Health consumption and its finance –Labor income of older individuals –Funding of the lifecycle deficit, i.e., the gap between consumption and labor income.

The NTA Flow Account Identity Inflows –Labor Income –Asset Income –Transfer Inflows Outflows –Consumption –Saving –Transfer Outflows Source: Mason, Lee, et al., 2009; Lee, Lee, and Mason, 2008.

Figure 5. Age-specific profiles of per capita consumption and production: Japan, Labor income 2004 Labor income 1999 Labor income 1994 Labor income 1989 Labor income 1984 Consumption 2004 Consumption 1999 Consumption 1994 Consumption 1999 Consumption 1984 Source: Ogawa, Chawla, and Matsukura forthcoming. Per capita LCD at older ages has increased substantially during the last 20 years. Japan is also aging rapidly; hence, growth in the total LCD for elderly has been very rapid.

Pattern in Japan and Elsewhere Raises Two Important Questions What steps should be taken to control health care spending which accounts for most of the increase of consumption at older ages? Can policies raise the labor income of the elderly? –Age at retirement: Gruber and Wise –Productivity of older workers

Per Capita Health Consumption, Japan, Note: Long-term care introduced in early 2000s included in 2004a.

Source:

Note: Synthetic cohort values calculated using L(x)/L(55) using the US 2000 life table for both sexes combined. Health spending data:

Summary Public spending on health in the US is similar to that in other industrialized countries, e.g., Japan and Germany: high and steeply increasing with age. Private spending on health is more important in the US and some developing countries than in other industrialized countries. The rise in private spending with age in the US is very steep, but not so elsewhere.

Labor Income

Labor Income as a Percentage of Consumption for 65+ (Above Average) Source: S-H Lee 2009.

Labor Income as a Percentage of Consumption for 65+ (Below Average) Source: S-H Lee 2009.

Summary: Labor Income Strongly related to level of development Very low in Europe and compared with Japan, Taiwan, and the US. Strong disincentives to work due to tax and pension provisions in many European countries. Compulsory retirement except in the US. Low labor income is partly low participation, but also wages and productivity are very low.

Reallocation Systems for the Elderly Lifecycle Deficit is funded in three important ways –Asset-based reallocations Asset income Dis-saving Almost all is asset income; dis-saving is rarely observed. –Net public transfers Value of all good and services received through the public sector Cash transfers, e.g., pensions. Less taxes paid –Net private transfers Net Inter-household transfers Net intra-household transfers

Reallocations as a share of lifecycle deficit, 65 and older, selected countries, recent year.

Source: Lee, Lee & Mason (2007) United States (2003)

Source: Salas & Rachelis (2008) Philippines (1999)

Source: Chawla (2008) Thailand (2004)

Source: Mejia-Guevara (2008) Mexico (2004)

Source: National Transfer Accounts South Korea (2000)

Source: Mason, Lee, Tung, Lai & Miller (forthcoming) Taiwan (1998)

Source: Ogawa, Mason, Chawla & Matsukura (2008) Japan (2004)

Source: Rosero-Bixby & Robles (2008) Costa Rica (2004)

Source: Risto & Vanne (2008) Finland (2004)

Source: Kluge (forthcoming) Germany (2003)

Source: Fuernkranz-Prskawetz & Sambt (2008) Austria (2000)

Patterns and Generalizations In industrialized countries familial transfers are modest and typically downward, i.e., from the elderly to their children and grandchildren. In Latin American countries, familial transfers are also downward. Familial transfers are an important source of support for elderly in Asian countries. Developing countries rely more on asset-based reallocations than industrialized countries. The US relies more on asset-based reallocations than other industrialized countries. Public transfers are much more important in Europe and Japan than the US. Public transfers are much more important in Latin America than in developing Asia.

Age Patterns Asset-based reallocations decline and transfers increase with age (except in Finland) Familial transfers increase in Philippines, Thailand, Mexico, S. Korea, Costa Rica, and Japan. Public transfers increase in Austria, Germany, and the US. In Taiwan, public transfers increase among young elderly and familial transfers among old elderly.

Reallocation System Issues Incentive and dis-incentive effects on –Retirement –Saving –Human capital investment Do systems vary in their risk-sharing features? Which systems are most vulnerable to population aging?

The Endh